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Return on assets is net income divided by total assets. Thus if net income is $100,000 and total assets are $1,000,000, return on assets is 10%. Return on assets is often computed as net income divided by average assets ((beginning assets + ending assets)/2), because net income is generated continually through the period, not only on the last day. Also, note that return on assets calculates the return on all capital, from both creditors and owners -- unlike return on equity, which includes only owners capital. Return on assets is more revealingly, if less efficiently, computed as Net Margin (net income/sales) X Asset Turnover (sales/assets). Because sales appears in both numerator and denominator, the equation reduces to net income/assets, ie, return on assets. The first part of the return on assets equation shows how much profit the company can wring from each sales dollar. The second part of the return on assets equation shows how efficiently the company can generate revenue from the assets it has. Both higher profitability and higher efficiency yield a better return on assets. |
